Interest rate rise hits mortgage payers

Homeowners faced further hikes in mortgage repayments today after the Bank of England increased interest rates for the third time in six months.

The Monetary Policy Committee's decision to put up rates by 0.25% to 4.25% will cost homeowners with an average £65,000 mortgage just under £10 month.

If lenders pass on the full hike in rates, monthly repayments on a £65,000 loan will increase to £428.78 from £418.79, based on a new rate of 6.25%.

But first-time buyers, who are more likely to have a loan of around £100,000, will see their repayments rise by £15 a month to £659.66.

While today's rise is likely to have little impact on people's ability to afford their mortgages, homeowners have now seen cumulative increases of nearly £30 to a £65,000 loan since November.

And if the base rate ends the year at 4.75%, as many economists are predicting, they will have seen their repayments rise by a total of £50 since interest rates first began to increase.

While inflation is currently below target at 1.1%, the Bank warned in a statement accompanying today's decision that inflationary pressures were likely o build as the economic recovery takes hold.

It said today's move was needed to keep inflation on track to meet its 2% target over the medium term.

Aside from inflation worries, members of the Bank's interest rate-setting committee have also received regular warnings that the sustained high levels of consumer debt and surging house prices pose a major threat to economic stability.

Today's upward move will cost homeowners with an average £65,000 mortgage just under £10 a month, increasing repayments to £428.78, based on a new rate of 6.25%.

First-time buyers, who are more likely to have a loan of around £100,000, will see their repayments rise by £15 a month to £659.66.

Investec chief economist Philip Shaw said: "Today's move comes as no surprise. The Bank remains very concerned about the strength of consumer spending and the prospect of inflationary pressures building over the next couple of years."

Net mortgage lending rose by £9.34 billion in March, while there was also a £963 million increase in borrowing by credit card, leaving consumers collectively owing £54.03 billion on their plastic.

The only area of concern for the nine-member committee is likely to have been the state of UK manufacturing after first quarter GDP figures came in weaker than expected following poor industrial output numbers.

CBI chief economic adviser Ian McCafferty said businesses had expected today's rate rise, particularly as the Bank had adopted a "well-signalled, gradual approach" towards raising rates in recent months.

But he added: "With inflation well under control, firms would have serious concerns if this move were to herald the start of a series of more rapid rises.

"The two previous increases have not yet had time to take full effect and business is still concerned that sterling's renewed strength could hold back the recovery."

TUC chief economist Ian Brinkley said: "The Bank has made a wrong move today. Although the monetary policy committee is right to be concerned about rising house prices, inflation is almost non-existent, and a 'no change' decision would have made more sense.

"Manufacturing, whilst improving, is still on very shaky ground, and today's decision will do nothing to improve the sector's chances."

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